United Nations: Rural economic transformation central to LDCs

Published on Fri, 2016-02-12 14:05

Given that most of their population lives in rural areas, the rural economies in the Least Developed Countries (LDCs) will need to undergo structural transformation in order to reach the United Nation's Sustainable Development Goals (SDGs), the UN Conference on Trade and Development (UNCTAD) has said.

In its latest Policy Brief (No. 46 of February 2016), UNCTAD has proposed that the LDCs engage in poverty- oriented structural transformation of rural areas, encompassing the upgrading of agriculture, the diversification of rural economic activities and the strengthening of synergies between both.

According to the Policy Brief, more than ever, rural economic transformation will be central to the development of LDCs as they work towards the Sustainable Development Goals.

"These Goals signal both the need and the opportunity for a new approach to development policies, given the gap between the progress required by 2030 and that of recent decades."

The UNCTAD paper cited several reasons for the need to focus on rural transformation in the LDCs.

First, it said, more than two thirds of their total population live in rural areas, and this pattern is not expected to change substantially by 2030.

Rural population growth will continue to be much faster, and the rural share of the population in LDCs will remain much higher than in other developing countries throughout the achievement period of the Sustainable Development Goals (2015-2030).

Second, agriculture plays a crucial role in all LDC economies, accounting for 60 per cent of total employment and 25 per cent of value added. In many of them, it also represents a major source of export revenues.

Third, shortfalls in human development targeted by the Sustainable Development Goals are much greater in rural areas of LDCs. The proportion of people living below the national poverty line in these areas is generally about twice as great as in urban areas.

"Typically, rural people in LDCs are 50 per cent more likely than their urban counterparts not to have access to sanitation or to attend secondary school, twice as likely not to have access to electricity or to attend primary school, and more than four times as likely not to have access to clean water."

The UNCTAD paper also pointed to the unsatisfactory performance of the agricultural sector in LDCs.

Agricultural labour productivity in LDCs between 2011 and 2013, it said, was 19 per cent of that in other developing countries and just 1.8 per cent of that in developed countries.

"Given the concentration of the labour force in agriculture in LDCs, this broader productivity gap is the major cause of poverty in these countries and of the income divergence between LDCs and these other country groups."

The total food trade deficit of LDCs has widened dramatically, from $2 billion in 1995-1997 to $21.8 billion in 2011-2013.

In order to overcome the development gaps of LDCs and their rural areas, the UNCTAD paper proposes the poverty-oriented structural transformation of rural areas, whose objectives are:

* Increase the overall level of labour productivity as a basis for a sustained development process;

* Provide productive economic opportunities for the entire workforce;

* Raise the lowest levels of labour productivity to a level that can generate an income that is above the poverty line; and

* Ensure that such increases in productivity are fully translated into higher household incomes.

"Alleviating capital constraints on small farms and rural enterprises is critical to transform the rural economy and achieve the objectives of poverty-oriented structural transformation," it said, noting that access to financial services and credit is at best limited in most rural areas of LDCs, especially beyond the peri-urban areas.

As a result, rural producers and consumers in these countries are forced to rely upon their own savings or informal financing mechanisms, such as money lenders, group savings or upon migrants' remittances.

In many LDCs, lack of access to commercial finance reflects both the underdevelopment of the financial system and a strong risk aversion in the banking sector, which skews assets towards safer investments such as government securities, and away from riskier activities such as lending to small- and medium-sized enterprises and micro-enterprises.

"Banks are reluctant to lend to these businesses, largely because of the high risks and limited information about creditworthiness."

According to the Policy Brief, another sector for which financing is sorely needed in LDCs is rural infrastructure, including both soft infrastructure - marketplaces, communications networks, education and health services, financial and payments systems and market information systems - and hard infrastructure - electricity and water supply, storage facilities and roads.

"Yet, the density and quality of infrastructure are crucial to access markets for output and inputs, reduce production and transaction costs, and thus ensure effective supply response."

The implementation of the Sustainable Development Goals will require massive investments in social infrastructure, and public investment will play a major role in expanding and upgrading economic and social infrastructure, the UNCTAD paper stressed.

"Therefore, LDCs and their development partners will need to secure the financing of infrastructure investment," it said, adding that micro-finance has been widely promoted as a means of financing small-scale investment in a context of poverty reduction.

"Nevertheless, it remains unclear under what circumstances micro-finance can be of real benefit to poor people."

According to UNCTAD, micro-credit is characterized by high interest rates and short maturities, while rates of return on investment in rural areas of LDCs are highly uncertain, especially on the innovative investments essential to rural transformation.

Often, such returns are relatively low, said UNCTAD, adding that additional risks can arise from several factors: the possibility of crop failure, affecting agricultural incomes and demand for non-agricultural products; house-hold income losses, for example, caused by ill health; and diversion of funds to maintain a minimum level of consumption due to very low and unpredictable incomes.

"Supply-side constraints on micro-finance result from the high cost of reaching clients in widely dispersed populations and problems in enforcing repayment. High interest rates, short maturities and uncertain returns also limit investments, particularly in innovation."

Given the shortcomings of micro-finance as a solution to the financing shortfalls of rural economic activities, UNCTAD said that alternative policy approaches to alleviating capital constraints on small farms and rural enterprises must be exploited.

A possible approach is to provide conditional interest rate subsidies on micro-credit. For example, where the market rate on micro-credit is 40 per cent per annum, an interest subsidy of 30 per cent could be provided, provided the interest rate to the borrower does not exceed 10 per cent.

This could leverage private financing more effectively and greatly increase the uptake of micro-credit, while minimising its potential negative impacts, said UNCTAD.

According to the Policy Brief, another option would be in-kind micro-grants. It said in remote and isolated areas, economies are often oriented towards subsistence production, so that commercial activity and monetisation are limited. In such conditions, micro-credit is unlikely to provide a viable option, even with conditional interest rate subsidies.

Here, there may be a case for in-kind micro-grants of productive inputs: Each household could be offered a choice of locally appropriate agricultural inputs, with advice on their use, or equipment or materials for non- agricultural production, up to a specified value, delivered annually ahead of the planting season.

This would have the combined effect of financing investment in agricultural upgrading, which would otherwise be problematic in a largely de-monetised local economy, providing access to technologies that would otherwise be unavailable, and engineering a selective opening of the economy to productive inputs.

UNCTAD said that beyond its potential contribution to financing in-kind micro-grants, official development assistance has an essential role to play in financing rural infrastructure and, more generally, the investments required to achieve the Sustainable Development Goals.

"There is a strong case for increasing the target level of official development assistance from 0.15-0.20 per cent of donor gross national income to 0.35 per cent - half of the overall official development assistance target of 0.7 per cent to which donors are committed under Goal 17."

According to UNCTAD, this would be commensurate with the LDCs' share of the human development deficits addressed by the Sustainable Development Goals, and with the increase in the rate of extension of access to rural infrastructure required to achieve them.

It would lead to an increase in official development assistance to LDCs from $30 billion in 2013 to about $250 billion by 2030, while also allowing a sharp rise in official development assistance to other developing countries, provided the 0.7 per cent commitment is fulfilled.

Development banks can also play an important role in mobilising resources for productive investment. They can promote investment in activities with high social rates of return and encourage complementary and inter-dependent investments.

"Many LDCs, however, lack the resources to establish national development banks. In these cases, regional development banks and development banks from other developing countries can play a major role in closing the financing gaps of these countries."

UNCTAD further said that cooperatives, producers' associations and women's networks can help improve access to credit and reduce its cost by acting as intermediaries or guarantors for borrowing by members, or through credit-and-loan arrangements among members.

It noted that the rapid spread of mobile phone coverage in rural areas of most LDCs helps to spread financial inclusion and reduce transaction costs. "Combined with increasing investment opportunities through rural development, this could contribute substantially to increasing the scale of lending opportunities to a level sufficient to attract commercial lenders to rural areas, potentially reducing the cost of micro-credit to a more sustainable level."

Such systems can also enhance business viability by increasing access to market information and facilitate and reduce the cost of remittances from migrants in urban and other rural areas and abroad.

The UNCTAD paper also pointed to the need to overcome gender-based constraints, saying that ensuring equal access to finance for women and men is key to overcoming gender constraints in rural development.

"However, the primary means of doing so is to mainstream gender into core programmes and policies, as schemes that target women exclusively arbitrarily exclude vulnerable men."

Targeted interventions may nonetheless have a role in specific contexts where women are a marginalised social group, and the establishment of publicly-backed schemes oriented towards women, though important, is not sufficient.

"Effective targeting of rural women may also require measures such as informal guarantees - for example, group lending and liability and other trust relationships - or collateral and more lenient repayment terms."

UNCTAD also said training in financial literacy and business skills and assistance in preparing viable business projects are an essential pre-condition to credit-based financing, particularly where education is limited, so as to limit risks to creditors and borrowers and increase returns on investment.

Credit-based schemes should therefore be closely linked with training and/or mentoring, it added, noting that some good practices can be learned from initiatives such as the micro-finance consumer education programme in Uganda and financial education for young women in Zambia, which have had a positive impact on savings behaviour and financial awareness.

It further said that financing of rural transformation will require better management of collaterals and risks.

"While land can be used as collateral, this results in a risk of dispossession, seriously impairing the borrower's ability to emerge from poverty. Warehouses issuing negotiable receipts for crops, which can be used as collateral for short-term finance, could provide a more satisfactory alternative."

In their pursuit of the Sustainable Development Goals, it will be crucial for the LDCs to tackle the financing constraints faced by rural producers and rural infrastructure developers.

UNCTAD said that the policy alternatives that it has proposed should be implemented by LDCs and their development partners, thereby allowing these countries to embark on poverty-oriented structural transformation and achieve the Sustainable Development Goals.

This will be especially challenging, given the circumstances in which they will implement the 2030 Agenda for Sustainable Development. In particular, LDCs will be among those most vulnerable to climate change and will be the least able to recover from climate stresses, which will further raise the challenges of achieving rural structural transformation.

"At the same time, the international context in which the LDC economies evolve will be more conducive to their development if these countries' concerns are adequately addressed by the international trading system," said UNCTAD.